Key Points
Simpler Regulatory System Bill: contains a proposal to allow companies to publish their annual reports online as the default option.
Corporate social responsibility: Investors now look beyond the bottom line. They want to know about the company’s social and environmental activities.
Fundraising: Proposals in the Simpler Regulatory System Bill have been designed to ensure that companies can raise funds in the most effective way without facing any unnecessary impediments.
Infringement notice scheme: is designed to deter companies from withholding information which should be disclosed to the market.
Thank you, Michael [Bray, Partner KPMG] for your very kind introduction.
I’m delighted to have been invited to give the keynote address at today’s seminar of the Australasian Investor Relations Association.
Today’s topic — the future face of investor communication — is a very important one.
It’s also quite timely. Because it seems that almost every day, a new technological innovation emerges that provides greater opportunities to interact and communicate with investors.
These days, it’s a given fact that good client communication is absolutely vital to the success of any business. And that applies to the investment community as much as it does to any other business sector. If you fail to communicate effectively with your shareholders, you shouldn’t be surprised if they go off and invest elsewhere.
As Lee Iacocca, the former CEO of Chrysler, put it:
“You can have brilliant ideas, but if you can’t get them across, your ideas won’t get you anywhere.”
The increasing importance of client communication highlights the crucial role of investor relations managers.
As the Parliamentary Secretary to the Treasurer, I am keenly aware that our system of corporate regulation must support and encourage effective communication with shareholders. In fact, when I’m considering possible refinements to our regulatory system, I always try to ensure that they keep pace with technological developments.
Today, I am going to outline the key initiatives the Australian Government has taken to achieve these goals.
The steps the Government has taken include annual reporting… fundraising… and disclosure documents.
These measures are being implemented through the Simpler Regulatory System Bill, which I introduced to Parliament last week.
This afternoon, I would also like to talk to you about the Government’s work on several other aspects of the regulatory regime. These include the register of relevant interests… and the review of civil penalties.
Simpler Regulatory System Bill — annual reporting
Ladies and gentlemen, the Simpler Regulatory System Bill has been designed to simplify and enhance aspects of corporate and financial services regulation. It will lower operating costs for business and it will cut red tape.
The Simpler Regulatory System Bill is, quite simply, the most comprehensive package of corporate law reform proposals since CLERP 9.
The measures in the Bill were carefully developed following a process of extensive consultation with stakeholders.
And I would like to take this opportunity to thank the Australasian Investor Relations Association for its active involvement in the consultation process.
As you would know, a key aspect of this Bill is the reform relating to the distribution of annual reports.
It’s no exaggeration to say that the internet has revolutionised almost every aspect of our lives — from the way we work… to the way we spend our leisure time… the way we shop… and even the way we keep in touch with friends and relatives.
Online technologies have also changed the way companies communicate with their shareholders.
Recognising this, the Bill contains a proposal to allow companies to publish their annual reports online as the default option. Companies will no longer be required to mail out a printed copy to each and every shareholder.
Of course, some shareholders may prefer to continue receiving their annual report in hard copy, and they can still request them in this format.
Potentially, publishing annual reports online can achieve substantial cost savings.
For example, research undertaken by Chartered Secretaries Australia in 2005 showed that, in the top 20 listed companies, the average cost of producing an annual report was nearly $7 per shareholder. In the top 200 listed companies, that cost rose to over $9 per shareholder.
Given the potential for cost savings, it’s not surprising that the business community strongly supports the option to publish annual reports online as this leads to savings for investors.
Again, not surprisingly, it’s an initiative that also generated quite a lot of fan mail!
I’ll read a bit from just one of the many letters I received supporting this proposal - We fully support the Government’s initiative and are keen to see this legislation given the absolutely highest priority.
As well as potentially saving companies a great deal of money, this proposal will also save a lot of trees!
So far, I’ve spoken about annual reports in terms of the delivery options. But it’s also important to look at the content of the reports.
I don’t need to tell an audience such as this that annual reports are one of the most important communication tools for companies.
An annual report can say a lot about a business, and not just in performance terms and through the financial information presented. In the creativity of its layout and design, an annual report can also help to build the company’s image, communicate style and set a tone.
The online publishing option will give companies the scope to make their annual reports more interactive… more innovative… and more user-friendly.
This initiative will create powerful investor communication possibilities. For example, companies could incorporate multimedia technology into their annual report.
But it goes without saying, of course, that even the most sophisticated and clever production will never work if the actual communication process is poor.
It’s imperative that an annual report is readily understandable by all investors. And that it provides information that is relevant and meaningful to them.
To help companies communicate better, the Australian Institute of Company Directors, in association with PricewaterhouseCoopers, has published a template for a shareholder-friendly report. It was developed to improve the usability of corporate reports and make them more meaningful, particularly for retail shareholders.
I always welcome industry initiatives to promote more effective communication with investors. I would urge you to use this opportunity to take a fresh look at the way you communicate with your shareholders.
I intend that the Simpler Regulatory System Bill be passed during the Winter session of Parliament. That will enable the community to reap the benefits as soon as possible.
In particular, passage in Winter will enable the online distribution of annual reports to take effect for the 2006-07 financial reporting year.
I should add that Australia isn’t the only country introducing reforms to allow annual reports to be published online as the default option. Both the United States and the United Kingdom have enacted similar reforms.
Corporate social responsibility
As today’s investors have become skilled users of technology, they are taking a more sophisticated approach to their investments.
Investors now look beyond the bottom line. They want to know about the company’s social and environmental activities as they recognise these activities are also important to a company’s long-term prosperity.
As you would be aware, our current regulatory framework already requires companies to disclose certain non-financial information in their directors’ reports.
Some companies are moving beyond this requirement and prepare separate sustainability reports in which they report against particular environmental, social and economic indicators.
The directors of these companies see the reports — and rightly so — as another way to enhance their organisation’s reputation. The reports also increase the transparency, and therefore the accountability, of the company.
Sustainability reporting is one part of a broader trend in Australian business. Corporate leaders are increasingly aware of the importance of responsible business practices.
Of course, this does not mean that businesses should not seek to maximise profits. Commercial activities make many valuable contributions to society — including creating employment, generating tax revenue, and supplying important goods and services to the community.
Rather, the greater focus on sustainability reporting means that business realises that it needs to take a broader focus to maximise profits.
And it is this interest in long term profitability that investors need to understand and factor into their decision-making.
The Government supports a broader approach to business decision-making that incorporates consideration of the social, environmental and economic consequences of a business decision.
The Government already fosters and promotes corporate social responsibility through initiatives such as the Prime Minister’s Community Business Partnership Awards and the Business Roundtable on Sustainable Development.
We are also looking at other ways we can promote responsible business practices, in the light of recent reports from the Corporations and Markets Advisory Committee and Parliamentary Joint Committee.
Fundraising
The Simpler Regulatory System Bill addresses another aspect of investor communication — the disclosure documents required for fundraising.
The proposals in the Bill have been designed to ensure that companies can raise funds in the most effective way, without facing any unnecessary impediments. The amendments are also designed to remove inconsistencies between different parts of the Corporations Act.
For example, under the Bill a company conducting a rights issue will no longer need to incur the cost of preparing a disclosure document. However, companies will be required to ensure that they provide all the necessary information to investors. This will allow investors to make a fully-informed decision on whether or not to participate in the rights issue. This will also reduce the costs of conducting a rights issue.
The Simpler Regulatory System Bill also amends the requirements for employee share schemes in unlisted companies.
These amendments will relieve companies from many existing regulatory requirements relating to the operation of employee share schemes. However, companies would be required to provide employees who participate in the scheme with a disclosure document. Listed entities which already receive class order relief from these requirements will also be able to take advantage of this initiative.
These proposals ensure that the Corporations Act will strike the right balance between — on the one hand — companies being able to raise funds in a cost-effective manner, and — on the other hand — shareholders having the right information to make informed investment decisions.
The Simpler Regulatory System Bill also contains a number of other fundraising measures that I would like to touch on.
The Bill includes amendments designed to facilitate small scale fundraisings. It will achieve this by granting further relief from the full disclosure requirements of the Corporations Act. By allowing businesses easier access to capital, this measure will promote business creation and expansion.
Another set of amendments will further facilitate certain sales of quoted securities and other financial products which are subject to the continuous disclosure requirements. It will do this without requiring the provision of a disclosure document.
Other amendments will provide relief from certain requirements relating to advertising and publicity for offers of securities requiring a prospectus.
As well, the Bill will facilitate the offer process for stapled securities. The proposed amendments are designed to address issues which arise in the preparation of the combined prospectus and Product Disclosure Statement required for stapled securities.
These measures are yet another demonstration of this Government’s commitment to refining the fundraising regime, improving disclosure and the Government’s commitment to reduce the regulatory burden on business.
Infringement notices
Earlier, I spoke about the importance of communicating with shareholders through company annual reports.
The continuous disclosure regime provides another key way for companies to communicate with investors.
I’m sure you would all remember the significant reforms the Government made to the enforcement of the continuous disclosure regime through CLERP 9. In 2004, as part of CLERP 9, ASIC was given the power to issue infringement notices for breaches of the continuous disclosure provisions.
In terms of investor communication, the infringement notice scheme is designed to deter companies from withholding information which should be disclosed to the market.
Infringement notices are also designed to encourage compliance with the continuous disclosure requirements — without the need to resort to lengthy and costly court proceedings.
In March this year, the Government released a consultation paper on the operation of the infringement notice provisions in the Corporations Act.
The consultation process gave stakeholders the opportunity to let the Government know about their experiences with the infringement notices scheme. It also allowed stakeholders to suggest ways we could improve investor protection in relation to the continuous disclosure provisions.
Today is the deadline for submissions. I would like thank everyone who provided input into this process. I will carefully examine these submissions and consult with Treasury before deciding on the best course of action.
Other issues — register of relevant interests and penalties
Before concluding, I would like to briefly outline some other aspects of the regulatory regime we are currently working on.
Firstly, there is the release of a consultation paper on the register of relevant interests.
The register was introduced in 2004. It is designed to identify those investors who have power or control over voting securities in the company. This information does not appear on the members’ register.
Submissions on the consultation paper closed in February. We are currently examining submissions, and I expect to make recommendations on the future of the register shortly.
The second initiative I would like to cover is the review of penalties under the Corporations Act.
To be effective, a regulatory regime must strike the right balance between compliance and enforcement. We need to provide strong incentives for responsible conduct. Yet we don’t want to unduly interfere in the freedom of people to run their businesses efficiently.
To ensure we get the balance right, we need to monitor market developments and actively explore alternative regulatory approaches.
To achieve this, we are reviewing the design of our sanctions for misconduct. These sanctions have evolved over a number of years, often in response to particular cases of misconduct.
Currently, corporate law relies almost exclusively on criminal sanctions. The same criminal penalties apply to people who intentionally breach the law for economic gain and those who honestly try to comply.
And of course, imposing criminal sanctions may also involve significant costs and delays. There is a compelling argument that this type of sanction should be reserved for the most serious misconduct.
We are now considering whether it would be preferable to use civil sanctions for less serious breaches of corporate law.
The expanded use of civil sanctions would help us to strike the right balance between deterring undesirable conduct, and not unfairly penalising those who make an honest attempt to comply with the law.
Submissions to this review also close today and again, I would like thank everyone who provided input into this process.
Conclusion
Ladies and gentlemen, to borrow again from Mr Iacocca, brilliant ideas won’t get you anywhere if you can’t get them across.
While new technologies emerge almost every day, a central challenge for Australian companies doesn’t change. That is the ongoing challenge of communicating effectively with clients and investors.
New technologies do, however, present yet another option for achieving the most effective communication possible.
Please be assured, the Australian Government fully supports you in that endeavour and I wish you well in your deliberations today.
Thank you.